Millions of retirees are operating on a fixed income, which can make it increasingly difficult for them to pay for life's necessities. For that reason, it makes sense for them to continuously look for new ways to boost their income, as even small increases can go a long way toward helping pay for living expenses, and even create more wiggle room in their budget.
With that in mind, we asked a team of our Motley Fool contributors to share a proven way to get more income in retirement. Read on to see if any of their suggestions can help you out.
Know how Social Security benefits are calculated
Brian Feroldi: Many retirees are dependent on Social Security for the majority of their income, so it's essential to know the details behind how benefits are calculated to receive the biggest monthly check possible.
One crucial thing to know is that benefits are calculated based on your lifetime earnings history, indexed for inflation. The SSA adjusts them for inflation to account for changes in the standard of living that occurred during the worker's career.
Once the earning history is indexed, the highest 35 years of income are added together and then averaged. From that number the government calculates what is known as the "primary insurance amount," which is the payment that would be owed to the worker if he or she choose to take benefits at full retirement age.
Thus, one way to maximize your payout is to ensure that you have at least 35 working years on your record. If you come up short, the SSA will still use a 35-year history but calculate $0 for every year you didn't have an income.
If you find that you have a year or two of very low or no income and you're currently making good money, then it might make sense to stay in the workforce a little longer. Removing even just one or two zero-income years from your working history will go a long way toward boosting your payout, so make sure you have a full 35 years of history of strong income before you apply for benefits.
Work a few more years
Chuck Saletta: One of the most surefire ways to increase your income in retirement is to work a few more years and retire later. There are three key reasons this works for you:
- Your Social Security benefit increases if you wait to take it. You can take Social Security retirement at any time once you reach 62. The longer you wait, up until age 70, the larger your monthly payment will be.
- You can compound your savings for longer by waiting to tap into it. Assume for the sake of discussion that you're aiming for a 6% annualized return as you near retirement. Even without adding another dime to your investments, if you reach that target, three extra years of compounding at that rate can add around 19% to the amount you can withdraw.
- The longer you wait to retire, the fewer years your portfolio has to cover your expenses. The same study that came up with the famous 4% rule for safe withdrawal rates across a 30-year retirement indicated that for a 15-year retirement, an 8% withdrawal rate would likely work.
So whether you're looking for more Social Security income, the potential for a slightly larger nest egg, or the ability to safely tap more of that nest egg, working a few more years just might be your ticket to more income in your retirement.
Use the stealth retirement-savings vehicle that avoids all taxes
Brian Stoffel: Many people are familiar with Flexible Spending Accounts offered through their employers: You set aside a certain amount of tax-advantaged money every year to spend on healthcare, but if you don't spend it by Dec. 31, it disappears forever.
But not enough people are familiar with its cousin: health savings accounts (HSAs). These accounts have the notable difference that money you put in doesn't disappear at the end of every year, and it has triple tax advantages: (1) the money you put into it is tax-deductible, (2) any growth you experience from investing your HSA money is tax-free, and (3) all withdrawals from your HSA are tax-free given that they are used for qualified medical expenses.
To qualify for an HSA, you need to have a high-deductible health plan. This year, that means having a plan with:
- A minimum deductible of $2,600 for families ($1,300 for individuals).
- Out-of-pocket annual maximums of $13,100 for families ($6,550 for individuals).
For the current year, you can contribute up to $6,750 to an HSA for families, and $3,350 for individuals.
But there's an odd twist that can allow you to use your HSA for income in retirement. In the time between now and your retirement, you can make all of your healthcare payments out of pocket -- allowing your HSA money to continue compounding. So long as you keep careful documentation of your healthcare spending, you can "reimburse" yourself in retirement for your earlier healthcare payments, providing a reliable -- and perfectly legal -- form of tax-free income in retirement.
Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.
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